A Slight Recovery

Recession talks, terrible unemployment data and a gloomy economic outlook didn’t dampen the bullish mood last week, as traders looked passed the bad news, sending equity indices up across the globe. The major U.S indices closed the week with gains of approximately 4%, while the U.S Dollar index closed up by 0.5%, showing that the dollar has still got some fight left in it, against its counterparts.
The major market mover of the week was unemployment data, which showed that the number of people employed in all non-agricultural business sectors, contracted by a whopping 80,000 while the unemployment rate jumped from a previous 4.8% to 5.1%, posting the worst reading in roughly five years. Volatility picked up immediately after the results were published, as investor were trying to figure out how the data will affect current trends, especially as the unemployment result breached the 5% benchmark level, a level which policy makers try to keep the economy under. As mentioned above, despite the bad news the major indices managed to withstand the battering, leaving sentiment high across the board. The current market reaction to the recent situation raises numerous
questions: Have the markets already priced in the worse? Have investors found comfort in recent remarks from the heads of the Federal Reserve and Merrill Lynch, both stating that the worst of the financial crisis is behind us? Or is recent sentiment just temporary, as investors are still tip-toeing from one bad outcome to another?
With commodity prices giving up their strength, investors pulling their money out of gold and the U.S dollar index stabilizing, it seems like an ideal situation for a nice bullish rally in stocks. To date, the markets are pricing in one additional rate cut, which according to analysts should do the trick to put the economy back on the right track. If that is the case, then it is only a matter of time until the Dollar receives its strength from healthy inflation caused by economic growth and not by monetary policy pumping additional money into the financial system. Taking a look at the S&P 500, one can see that bullish sentiment has returned as the stock market has found a temporary bottom forming a
double bottom pattern. In addition, divergence lines and a monthly chart pattern of the Dow index are showing that in medium term the markets could see higher grounds. One has to remember that due to the loss in value of the Dollar, market sentiment will depend on how the Dollar reacts in the
upcoming weeks. The U.S dollar index is showing us that a higher-low has been formed, confirming strength against six major currency pairs. For bullish sentiment to continue, it is necessary for the dollar to follow through, continuing to gain strength and lifting traders’ spirits.
Despite bullish signals across the board, one has to remember that market conditions are still influenced by headlines and economic data, therefore precaution is still required when trading. Carry trades have managed to climb higher this week while the Euro, a currency where traders have fled to for safe haven in the past, has encountered resistance, giving traders an excellent boundary to work with. Even though fundamentals are still pointing to a negative economy, one has to remember that expectations drive currency markets. Have traders had enough with bad news, seeing an end to the market turmoil?